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Experts Warn Of Stock Market Rotation to Counter Valuation Concerns

‘Stocks only go up’ has been the main theme all year round, as tech giants raced to record highs, conversely propelling stock indices to record highs as well. Big tech companies are flirting with record highs at the back of substantial gains in revenue, market share, and earnings. For how long the rally will continue is the big question.

Valuation Concerns

Strategists and fund managers believe the Bull Run fuelled by tech stocks could slowly be coming to an end given the elevated valuation levels. The experts believe it is high time value sectors such as banks, health care energy, and retail emerged as market leaders after underperforming the past year.

A major rotation is on the horizon as investors become wary of the elevated valuation levels in sectors that have outperformed the better part of the year. Likewise, banks, retailers, and energy stocks look attractive as the economy’s stabilization kicks in, especially with multiple COVID-19 vaccines coming into play.

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However, some experts expect value stocks and growth industries such as tech and biotech to continue doing well amid the rotation. This is partly because there is no particular reason why the FAANGS have to fall after the extraordinary gains.

Year-End Outlook

The sentiments are shared by Fundstrat’s analyst Tom Lee who expects the U.S stock market to hit new record highs in December. According to Lee, the stock market is poised to finish strong based on historical analysis of price action.

Since 1945, stocks have edged higher 100% of the time in December, whenever the S&P 500 was up 10% to 15%. Conversely, the S&P 500 is on course to return an average of 3% in December. One factor pointing to a continued stock rally is the VIX edging lower with each passing day.

However, the long term outlook is still uncertain. Going by history, the current decade has been good for the stock market, pointing to a possible correction in the next decade. Historical data is already exhibiting a strong reversal tendency.

Ruchi Gupta

Ruchi Gupta covers various beats from finance to technology and from lifestyle to hobbies. She has an MBA in Finance. Ruchi enjoys writing on celebrities and political news. She likes traveling and exploring places.

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